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Individualism (Capitalism)

Updated on March 23, 2017


There were a few forerunners in classical economics that predated and influenced Adam Smith’s concepts relating to the individual. One forerunner was Sir Dudley North who advocated for more lassaiz-fair trade within and among nations. Unlike the mercantilists, North recognized trade to be a mutual advantage by way of exchange in surplus, not specie. Another forerunner was Richard Cantillon who provided a foundation of thought for Adam Smith and individualism with the term “entrepreneur”. He also gave way to Smith by developing a theory of value and of price. Smith would later take the term value and break it down into two interpretations, “value in use” and “value in exchange”. David Hume was closely linked in thought with Adam Smith. Hume developed the price specie flow mechanism and showed awareness to the elasticity of demand which would later be enhanced by Smith. All of these men had thoughts that touched on individual principals. They opened doors for Adam Smith’s interpretations to influence much of what we see in mainstream economics.

Adam Smith lived in what was known as the time of enlightenment, or the age of reason. This was a period with two key dimensions throughout the eighteenth century; the people’s reasoning ability and the concept of natural order. The enlightenment as well as the physiocrats and their “imperfections” (Brue, 2007) are said to have had a major impact on Adam Smith’s views of the economy. Adam Smith provided his own views to the masses through the publication of his two books, The Theory of Moral Sentiments, and The Wealth of Nations. The content in these two books shows just how advanced Adam Smith’s perception of the economy was compared to others. He breaks down the idea of one person having sympathy for another. He says people enjoy seeing others happy even if it has no effect on their own lives. Smith also dives into the division of labor in the first chapter of his book, Wealth of Nations. This concept opens the reader to more economic thought based on individualism. At the time it was assumed that only the exchange of goods and agriculture added to the wealth of a country. By Smith’s division of labor, he opened many minds by introducing the idea of taking the same amount of workers and increasing their level of productivity individually, thus increasing output and providing more goods for exchange.

Smith’s harmony of interests and limited government theories really advocated individualism. In these views each individual in an economy intends to pursue his or her own self-interests and he or she unintentionally affect the interests of others in doing so. Workers seek out the highest paid jobs in a society, consumers the cheapest prices, and producers seek to maximize profit (cheap labor, increased productivity, etc.). All of these individual interests are part of the natural order of the economy. Smith uses the example of an invisible hand in the economy, a concept we hear so often today. This invisible hand represents competition among different individuals in the economy leading to innovation and increased creativity among individuals, thus making them happier and more intelligent as workers. There is a certain value given to goods by way of the invisible hand and natural order. This value helps set natural prices and wages for producers, consumers, and laborers.

As stated in the opening paragraph there are two interpretations of value; “value in use” and “value in exchange”. Smith explains that most often one can find value in the use of something while it has no value in exchange, and vice versa. His value theory in an advanced economy is very similar to what we see in our service based economy today. Simply put, his theory states that the real value of commodities is not a measure of the labor put into them, but the amount of labor that can be obtained with those commodities. The amount of labor that can be obtained exceeds the amount of labor that was used in the production of the commodity.

It seems that one of Smith’s most recognizable contributions to the individualism versus collectivism debate is in his theory on efficiency wages. In the 2008 recession we saw a huge decrease in employment and little change in prices and wages. Some employees during the time were able to keep their jobs. These employees were receiving efficiency wages, or higher than market clearing wages. Their wages are what kept them motivated to make it to work every day and stay productive. Companies cut low wage and low skilled employees and retained the employees that they had invested in through job training and education. In the highly competitive economic landscape today, we look around and see individuals competing and trying to obtain certain sets of skills that keep them valuable in their place of business. An individual’s knowledge is key to his success.


Brue, Stanley L., and Randy R. Grant. The Evolution of Economic Thought. Mason, OH: Thomson/South-Western, 2007. Print.

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